A US trade war could force the ECB to bring rates back down to emergency levels

The European Central Bank (ECB) could move to slash interest rates to “emergency levels” to mitigate the impact of a US-led trade war, the Financial Times reports. These potential cuts would come just two years after the ECB ended eight years of negative rates aimed at combating post-pandemic inflation.

The trade war in a nutshell: Donald Trump’s “America First” trade policies are shaking up global markets. Trump floated a 60% tariff on Chinese goods — and later, promised an additional 10% tariff — and a 10% tariff on imports from other countries, and promised separate tariffs on Canadian and Mexican goods.

The EUR’s not loving this: Since late September, the EUR has dropped more than 5%, now trading around USD 1.06. Investors are already pricing in potential ECB moves, with swaps markets predicting the deposit rate could fall to 1.75% from 3.25%. If things get worse, Pimco’s chief investment officer for global fixed income Andrew Balls expects even steeper cuts, warning of a dive into “emergency levels of policy rates.”

Across the Channel: The UK isn’t immune to trade war effects. Investors anticipate the Bank of England will slash rates by three-quarters of a point by the end of 2025, bringing interest rates to 4%.

US financial moderation isn't completely off the table: Trump’s nomination of hedge fund manager Scott Bessent as Treasury secretary could signal a shift toward more measured economic policies. Bessent has advocated for gradual implementation of policy changes, which has eased some market concerns. This perception of moderation has contributed to a slight retreat in the USD from its post-election high.

MEANWHILE- A positive US inflation report showing no significant movement is the latest economic data to indicate a rate cut from the Federal Reserve is likely when it meets next week, Reuters reports.

MARKETS THIS MORNING-

Asian markets are mostly in the green, with Japan’s Nikkei, South Korea’s Kospi, and Hong Kong’s Hang Seng all up, tracking a rally on Wall Street that saw the Nasdaq close at a record high. Futures, however, slipped slightly following the news.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.4% yesterday on turnover of SAR 6.1 bn. The index is up 1.5% YTD.

In the green: Go Telecom (+3.4%), Sumou (+3.3%), and Dallah Health (+3.3%).

In the red: Jahez (-7.2%), Anaam Holding (-7.0%), and Banan (-4.9%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.9% yesterday on turnover of SAR 66.1 mn. The index is up 27.5% YTD.

In the green: Enma AlRawabi (+12.2%), Molan (+11.0%), and Purity (+8.6%).

In the red: Leen Alkhair (-9.8%), AlWasail Industrial (-7.3%), and Gas (-7.1%)